How well-behaved are higher-order perturbation solutions?

Authors
Publication date 2009
Series DNB working paper, 240
Number of pages 57
Publisher Amsterdam: De Nederlandsche Bank
Organisations
  • Faculty of Economics and Business (FEB) - Amsterdam School of Economics Research Institute (ASE-RI)
Abstract
They are not well-behaved. The main problem is that one cannot control the radius of convergence when using perturbation techniques. Just outside the radius of convergence, higher-order approximations can easily behave extremely badly, and even within the radius of convergence one can expect higher- but finite-order perturbation solutions to display problematic oscillations. In contrast, with projection methods one can control the radius of convergence. Pruning, the solution proposed to deal with explosive behavior of higher-order perturbation solutions, is shown to be highly distortionary. A simple alternative based on short samples and rejection sampling is proposed and shown to be much less distortive.
Document type Report
Language English
Published at http://www.dnb.nl/publicatie/publicaties-dnb/dnb-working-papers-reeks/dnb-working-papers/dnb228946.jsp
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